Beating the odds

How Palo Alto's fastest-growing startups went from pipe dreams to success

Palo Alto entrepreneur Phil Shpilberg owns one of the fastest growing startups in the Bay Area. But four years ago, the future of his tech company was not so certain.

It was April 2014, and Shpilberg was nervous. He was awaiting a $300,000 payment from a client in Ukraine. At the time, Russia was invading Ukraine, and he couldn’t reach his client. Without receivables insurance and with no contact for weeks on end, Shpilberg and his Palo Alto startup, GameChangerSF, faced a daunting reality.

“We couldn’t pay our bills. We didn’t have $300,000 laying around to cover our losses,” said Shpilberg, who eventually received most of the money. “If they didn’t pay us, we would have probably declared bankruptcy.”

That experience was a wake-up call for him and his startup, which helps mobile apps acquire users by means of data analysis, primarily with advertising on platforms such as Facebook, Apple and Google. Shpilberg bought receivables insurance, outsourced his credit department and recruited new clients.

“I had to figure this out, right then and there,” he said. “We couldn’t live like that. We couldn’t do business like that.”

In many ways, Shpilberg’s story epitomizes Palo Alto’s startup culture: GameChangerSF was his second attempt at a startup after his location-based social network, called City Chatter, didn’t pan out. Following that initial failure, he jumped right back into the startup world with a new idea and was able to successfully carve out a niche in the middle of a gargantuan advertising industry. GameChangerSF was a good idea at the perfect time, he said, harnessing the societal shift toward mobile devices.

Shpilberg is among thousands of entrepreneurs who have flocked to Palo Alto hoping to find that perfect formula that has catapulted so many others in this famed tech community to success.

The city is home to more than 2,300 of the Bay Area’s 32,000-plus startups, according to networking website AngelList. That’s more than in neighboring Menlo Park and Mountain View combined. And seven out of the 174 companies on 2016 Fortune’s Unicorn List of international startups valued at over $1 billion are based in Palo Alto. Only Bejing, China, and San Francisco claim more rankings on the list with 21 and 34 respectively.

Where Silicon Valley’s startups are located(Click on each marker for city and number of startups)

But while Palo Alto has churned out some of the biggest tech giants in the world, the reality is that only a small percentage of startups actually find success.

So exactly what does it take to stand out in a world saturated with entrepreneurs all hoping to disrupt the market? The Weekly decided to ask executives from some of the fastest-growing startups in Palo Alto how they turned their ideas into full-fledged, flourishing enterprises.

Palo Alto's strong entrepreneurial culture

There’s no magic formula, but if there’s a place that could be considered magical for startups, it’s Palo Alto. That’s where brainpower, venture-capital funding and the innovative spirit all converge, according to the commonly held wisdom.

Niccolo de Masi, president of tech startup Essential, believes that in Palo Alto, he can find people who can do the work of 10.

“A good engineer is 10 times better than an average engineer,” de Masi said.

Founded in 2015 by Andy Rubin, the co-founder of Android, the Palo Alto company reached a valuation of over a billion dollars before shipping a single product. It has raised $330 million over the last 18 months, placing it second on the Business Journal’s list of hottest Bay Area startups, and aims to become a major player in the smartphone space.

With fewer than 50 employees for most of last year, Essential managed to release a phone and is preparing to launch a home automation product. Its phone, the PH-1 is compatible with accessories such a cordless docking station and what its website bills as the world’s smallest 360-degree personal camera that magnetically snaps onto the back of the phone.

“I don’t think we could’ve done it anywhere else in the world because it would’ve taken much longer to get the talent. You wouldn’t have people who are as experienced, and you would’ve had to have multiple satellite offices ... that slows down the pace,” de Masi said. “(Here), you can build true innovation, strategic thought and execution.”

Shpilberg said there is an intangible benefit to having a Palo Alto address; when he’s had GameChangerSF valuated, he believes there was a multiplier for his location.

“When your card says ‘Palo Alto,’ people go, ‘Oh, OK,’” he said. “You’re probably innovative — that’s the assumption. The other thing is that you’re successful enough as a company to be able to afford it.”

And when things don’t work out, it’s also better to be in Palo Alto, added Shpilberg’s wife, Sandra, who operates a health startup.

In Palo Alto’s culture of innovation and entrepreneurship, failure isn’t a shameful act but rather a lesson, she said.

“Failure is how we get to the next day so that tomorrow, we can do it differently and better,” she said. “There aren’t a lot of places that are like that.”

Ready for risks

Besides being in Palo Alto, successful entrepreneurs thrive on taking risks, whether that means leaving behind a comfortable job at an established company or trying new strategies to get their startups off the ground.

De Masi gave up his role of chairman and CEO at Glu Mobile so he could join Rubin’s team as executive chairman and “make a truly bold vision and a big swing into reality.” Rubin wanted him, de Masi said, to help “put a dent in the universe.”

De Masi, who now is running the company’s day-to-day operations, is taking another big strategic risk as the company positions itself to challenge the likes of Apple and Samsung by taking a page out of Apple’s playbook from when the Cupertino-based company developed the iPhone.

De Masi claims the PH-1 is the first phone to be made of a combination of ceramics (a premium material) and titanium, which is usually reserved for luxury watches and cars.

This is no different from a decade ago when Apple only built 1-2 million of the first iPhone to challenge then-industry leaders Nokia and Blackberry, who knew about the technology, but could not produce it en masse, de Masi said.

“Smaller companies can often access innovation earlier than established ones,” de Masi said. “That’s what the spirit of Essential is about, fundamentally. If Apple tried to make 100 million titanium iPhones, it would turn out that they couldn’t find enough materials and the titanium machines to do that.”

He said the company’s goal right now isn’t to maximize profits. The company wants to innovate, build a new national consumer electronic brand and make a run at Apple and Samsung.

“We are trying to disrupt a duopoly by showing consumers great things that can be achieved when you focus on innovation first, not on maximizing how much money you can get out of consumers’ pockets for buying your product,” he said.

Shpilberg left his job at 2K, a branch of Take-Two Interactive, to jump into the startup world. After realizing that mobile gaming was the future, he developed a system that could track advertising using data points to determine profitability. No one else in the gaming world was doing this at the time, but he felt that he wouldn’t make any headway at 2K, where coworkers dismissed his efforts as “cute,” and others said he was wasting his time.

“They looked down on these (gaming) phones because it was not cool,” Shpilberg said. “It was sort of beneath them.”

Five years later, with the mobile gaming market thriving, Shpilberg began seeing his former colleagues moving into the industry, and they asked for his help.

“That felt nice,” he said. “Almost everybody is working in this space.”

Right idea, right time

For Sandra Shpilberg, her success came down to having the right idea at the right time.

In 2015, she founded Seeker Health, a startup that uses social media to help biopharmaceutical companies enroll patients in clinical trials. Instead of following the traditional method of bigger recruiting companies, which use newspaper, radio or television ads to publicize a clinical trial, Seeker Health focuses on social media — such as Facebook ads — to target patients.

“We’re disrupting the whole clinical trial enrollment process, bringing technology and social media into a very antiquated and old process,” said Sandra, who has seen the company’s revenue double from 2016 to 2017. She expects it to double again this year, though she declined to disclose those figures.

Using Facebook, her company can focus recruitment messages on a specific target range — for instance, women ages 35-62 who have expressed certain interests.

“If I put (the ad) on a bus stop, and it’s a rare disease, I’m very unlikely to find that person,” Sandra said. “But if I can find some way to show this ad to those that may be most interested, then I have a better shot.”

Sandra also culled lessons that she learned from working at BioMarin Pharmaceutical and Nora Therapeutics, where she found that patients wanted some way to interact with companies online, and that some patients may talk about their medical conditions on social media.

With a team of seven, Sandra works with 16 different biopharmaceutical companies and has enrolled patients in about 22 different clinical trials in 2017.

Sandra is often asked if she wishes she had started the company sooner, perhaps 10 years ago. She couldn’t have — the world wouldn’t have been ready, she said. Now is the perfect time for this idea, especially with Facebook’s demographics expanding in age, she added.

Built to flip

Like many entrepreneurs, Phil and Sandra Shpilberg expect to flip their companies at some point — either merging them with similar startups or having a larger company acquire them. They aren’t necessarily aiming to build the next Google.

When online advertising was introduced 10-15 years ago, companies sprang up that eventually went out of business or were acquired, Phil said. To him, there is no question that the mobile advertising industry will go the same route. Eventually, the larger agencies will catch on and take over his niche.

“Eventually, they’re going to learn what we do and we’ll either join them or they’ll probably put us out of business,” he said. “As much as we’re the fastest growing company, we’re still small compared to the advertising behemoths out there.”

The same is true for Sandra’s company. She believes Seeker Health is positioned for great growth for the next few years and beyond, but she would eventually like to be acquired by a larger services or biotech company that might benefit from her customer base.

Flipping companies is common among startups today, though it was not the case 23 years ago, when Celeste Ford started Stellar Solutions, a Palo Alto-based aerospace engineering service company that does work for clients such as system integration — working through all phases of advanced engineering projects. Her goal was to create a built-to-last company, which was more of the norm back in 1995.

“Now, it’s, ‘How quick can you flip the company?’” Ford said. “Their investors or shareholders need that. It’s a different business model but one that I think is a good one.”

How Silicon Valley ranks nationally

(Click on each marker for region/state and number of startups)

Silicon Valley is home to 20.8 percent of the nation’s 156,612 startups. The region has about 9,675 more companies than the entire state of New York, which ranks as the second top state with the most startups.

Source: AngelList recruitment website, Feb. 26, 2018.

Ford has instead sustained her startup — she still considers it one — for more than two decades. It made more than $46 million in revenue in 2016, ranking it among the fastest-growing private companies in the valley.

Though more established than its junior startups in Palo Alto, Stellar Solutions has likewise focused on innovation as its approach to business. What Stellar Solutions offers is a “crossing the boundaries” theme, combining intelligence, defense, civil, commercial and international work into one. Ford had previously worked in each field with organizations such as COMSAT and NASA before launching her own company, seeing a need to combine the branches.

“Being able to borrow ideas from one place that could be used in another in a way that works technically is really valuable to customers,” Ford said.

The company’s innovation is not limited to products but also extends to the workplace culture. Ford’s overarching goal for the company is to “satisfy our customer’s critical needs while realizing our dream jobs.” For instance, if an employee wanted to work in the civil department today but the commercial space tomorrow, he or she can. In essence, the company supports workers creating their dream jobs.

Ford takes the slogan literally. In 2000, Stellar Solutions created a humanitarian division called QuakeFinder, which aims to find a way to forecast earthquakes. It was an employee’s dream job, and Ford agreed to fund the new branch.

“It’s a passion project for sure,” said Dan Coughlin, the director of QuakeFinder. “It’s completely off the beaten path from Stellar Solutions.”

Dan Coughlin, director of Quake Finder, stands next to a map of California showing the locations of some of the company's 170 earthquake sensors which measure electromagnetic changes.

But it’s become a full-fledged effort to find a way to predict earthquakes. QuakeFinder has deployed around 150 remote sensors in California, Peru, Chile, Indonesia, Greece and China, collecting data from about 1,000 earthquakes since 2005 above a magnitude of 2.5. Coughlin’s team has developed enough evidence to show a correlation between electromagnetic signals and earthquakes, some two weeks before they happen, and it is also publishing a series of papers documenting both the algorithm and results.

Coughlin believes that QuakeFinder is the only private entity making earthquake forecasts, and the continued support of Stellar Solutions, he said, is a “clear idea of Stellar supporting employees’ dream jobs.”

Reality check

No matter how successful or innovative, there is a reality for all startups: They are still startups.

Sandra Shpilberg struggles with the administrative work that comes with running a small business. Essential has had to be judicious with its funding and hiring; the company now employs 120 workers.

“While we’ve raised a lot of money for startup, it’s not a lot of money when we’re competing with an Apple or a Samsung,” de Masi said.

Ford has dealt with funding coming and going, commercial companies folding and programs being canceled, leading to major fluctuations in Stellar Solutions’ workforce. Over a decade ago, when the company was a lot smaller, a defense program called Discovery Two was called off. Just like that, 20 percent of her workforce was gone.

“You have some job security in that you’re working critical needs, but you don’t have job security if the whole thing you’re working on goes away,” Ford said.

And should a startup fizzle, there’s still a positive side to failing in an environment saturated with entrepreneurs, according to Jamie Russo, CEO of the Global Workspace Association, who founded Enerspace in 2012 to provide coworking space to startups struggling in expensive real estate markets.

Enerspace, located on East Bayshore Road in Palo Alto, is where both Shpilbergs work, along with about 100 other Enerspace members, the majority of whom are in tech. While Palo Alto isn’t the only city where startups can and do thrive, the density of young companies and people all striving to be innovative in the city helps.

It’s beneficial for entrepreneurs in a high-stakes, stress-inducing business, to be around like-minded peers, Russo explained.

“When you’re in an environment when other people are going through the same ups and downs that you are, there’s something very comforting in that,” she said. “You can look around and say ‘I’m not by myself in this journey.’”

Eric He is a freelance writer and former Weekly editorial intern. He can be reached at heeric@usc.edu.